SEBI Fines A Holiday Club Company's Directors ₹1.10 Crore For Unregistered Collective Investment Scheme

The Securities and Exchange Board of India (SEBI) has imposed a ₹1.10 crore penalty on four directors of Citrus Check Inns Limited, a holiday club company that marketed holiday plans.

The regulator held that the company operated an unregistered collective investment scheme (CIS) and engaged in fraudulent and unfair trade practices.

The order was passed by SEBI Adjudicating Officer N. Murugan against Omprakash Basantlal Goenka, Prakash Ganpat Utekar, Venkatraman Natarajan and Narayan Shivram Kotnis.

"The omission to disclose the true regulatory status of the scheme went to the root of the investment decision, as investors parted with their money without being made aware that the scheme was functioning in violation of the statutory mandate.", the regultor held.

SEBI initiated proceedings against Citrus Check Inns after receiving a complaint in 2014 alleging that the company was running a Ponzi scheme by mis-selling its holiday plans and failing to refund investors' money.

Citrus marketed 25 holiday plans under which customers paid upfront for holiday benefits. Under seven of these plans, customers who chose not to use the holiday benefits could instead redeem their accumulated points for amounts exceeding their original investment. SEBI alleged that these features meant the seven plans satisfied the characteristics of a collective investment scheme.

On a preliminary examination, SEBI formed a prima facie view that the company was operating an unregistered collective investment scheme in violation of the SEBI Act and the SEBI (Collective Investment Schemes) Regulations.

In 2015, SEBI passed an interim order against Citrus and its four directors. Subsequently, insolvency proceedings were initiated against the company. The Supreme Court stayed those proceedings and later constituted a Sale-cum-Monitoring Committee to oversee the sale of the company's assets.

SEBI alleged that Citrus launched 25 holiday plans, of which seven promised returns exceeding the original investment if the holiday benefits were not utilised. It alleged that the company mobilised around ₹2,722 crore through these seven plans and operated them without obtaining the registration required under the SEBI Act and the CIS Regulations.

The directors opposed the proceedings, contending that there had been an inordinate delay in initiating adjudication, that the Supreme Court was already supervising the investor refund process, and that any additional monetary penalty would reduce the funds available for repayment to investors.

Rejecting these contentions, SEBI noted that although the Supreme Court was overseeing the investor refund process, it had expressly permitted the regulator to take enforcement action and proceed in accordance with law.

The adjudicating officer held that the seven holiday plans satisfied all four conditions of a collective investment scheme under Section 11AA of the SEBI Act. It observed that investor funds were pooled and managed solely by the company, while investors had no day-to-day control over the management or operation of the plans.

It further observed that the company had introduced the schemes without obtaining the mandatory registration from SEBI.

"By soliciting and accepting investments under an unregistered scheme, the Noticees effectively represented to investors that the investment activity being undertaken was lawful and legitimate, while simultaneously circumventing the statutory regulatory framework applicable to such schemes."

Holding the directors liable, SEBI observed:

"The material available on record indicates that they were actively involved and had role in the conduct of the affairs and operations of the Company. Accordingly, I hold that Noticee Nos. 2, 3, 4 and 5, being directors of Noticee No. 1 Company, were responsible for its conduct and affairs."

On the allegation of fraud, SEBI held that by failing to disclose that the schemes were not registered with SEBI, the company deprived investors of information necessary to make an informed investment decision. It held that this amounted to a fraudulent and unfair trade practice under the PFUTP Regulations.

Considering that the company was already subject to the Supreme Court-monitored investor refund process, the adjudicating officer disposed of the proceedings against Citrus without imposing any penalty.

Accordingly, SEBI imposed a penalty of ₹35 lakh on Omprakash Basantlal Goenka and ₹25 lakh each on Prakash Ganpat Utekar, Venkatraman Natarajan and Narayan Shivram Kotnis, aggregating to ₹1.10 crore.